1. Corporate Governance – Principles, Policies and Practices 3e
Chapter 7
Functions of the Board

2. Functions of the Board what the board does
In which we consider:
what the board does
balancing the board’s performance and conformance roles
board committees - functions and authority
delegating board functions to management
corporate transparency.

3. Functions of the board
Figure 7.2: Board functions working through management

4. The conformance and performance roles of the unitary board
Functions of the board
The conformance and performance roles of the unitary board
conformance
performance

5. Functions of the board The Board’s Performance Roles
Strategy formulation - the board’s responsibility
strategic management and leadership
Policy making - the board’s responsibility
ensuring corporate polices are adequate
risk management
(e.g. takeover, failed leadership, disaster)
contingency plans.

6. Mission statements
J. Sainsbury, a UK retailer: "Our mission is to be the consumer's first choice for food, delivering products of outstanding quality and great service at a competitive cost through working faster, simpler, and together." Would these mission statements help in the making of strategic decisions?

7. Mission statements
The Ford Motor Company: "To become the world's leading consumer-company for automotive products and services“ General Electric (a conglomerate): "We bring good things to life“ Would these mission statements help in the making of strategic decisions?

8. Mission statements
Microsoft changed its mission statement from: "To empower people through great software – any time, any place, and on any device" to "To enable people and businesses throughout the world to realize their full potential". Would these mission statements help in the making of strategic decisions?

9. Mission and corporate values
Microsoft values statement
“As a company, and as individuals, we value:
integrity and honesty
passion for customers, for our partners, and for technology
openness and respectfulness
taking on big challenges and seeing them through
constructive self-criticism, self-improvement, and personal excellence
accountability to customers, shareholders, partners, and employees for commitments, results, and quality”.

10. Vision and mission statements
Coca Cola has an exhortatory mission statement
"Everything we do is inspired by our enduring mission:
To refresh the world... in body, mind, and spirit
To inspire moments of optimism... through our brands and our actions
To create value and make a difference... everywhere we engage."
“To achieve sustainable growth, we have established a vision with
clear goals:
Profit: maximizing return to shareowners while being mindful of our overall responsibilities
People: being a great place to work where people are inspired to be the best they can be
Portfolio: bringing to the world a portfolio of beverage brands that anticipate and satisfy peoples’ desires and needs
Partners: nurturing a winning network of partners and building mutual loyalty
Planet: being a responsible global citizen that makes a difference.”

11. Vision and mission statements
McDonald's vision is
“to be the world's best quick service restaurant experience. Being
the best means providing outstanding quality, service, cleanliness,
and value, so that we make every customer in every restaurant
smile."
McDonald's mission is to:
be the best employer for our people in each community around the world
deliver operational excellence to our customers in each of our restaurants
achieve enduring profitable growth by expanding the brand and leveraging the strengths of the McDonald's system through innovation and technology.”

12. Strategy formulation Long range planning SWOT analysis
Five forces model
Resource based approach

13. Five forces key issues Who is currently competing in our market?
How are they currently competing - price, service, quality etc.?
How do their costs compare with the value added by this business?
What strategic power do our upstream suppliers have over us?
Are they able to exercise strategic influence on us - by pricing, supply etc.?
Who are our customers? - types, location, volume etc.
What customer needs do we satisfy?
What strategic powers do our downstream distributors and ultimate customers have? Are they able to exercise strategic influence on us - by price demands etc.?
Could our customers' needs be met by substitute goods or services?
Could other firms enter the market?
What is keeping them out - high entry costs, know-how, low margins etc.?

14. Functions of the board financial policies
Policy – the rules, systems and procedures laid down by the board to guide and constrain executive management
financial policies
employment and labour relations policies
marketing policies
Product/service policy
Pricing policy
Distribution policy
risk management policies
etc…

15. Functions of the board Reserved powers of the board (board mandates)
Remuneration and selection of auditors
Approval of interim and final financial statements
Significant changes to accounting policies
Board appointments and removals
Directors’ remuneration policy
Major business acquisitions or disposals
Approval of investment projects (more than $xm)
Terms of reference for board committees
Appointments to board committees
Approval of overall corporate strategy and direction
Terms and appointment of top executives
Fundamental changes to pension scheme rules
Main treasury policies, including debt/equity mix, major borrowings and currency exposure
Corporate risk management
Major changes to company business.

16. Functions of the board The Conformance Roles of the Board
The board’s responsibility for monitoring and supervising executive management
relationships with managers and supervisors
The board’s responsibility for accountability
statutory reporting, reporting to shareholders, regulators, other stakeholders
avoiding fraud and illegal activities
non-financial reporting.

17. Monitoring and supervising management
The Board’s responsibility for monitoring and supervision of executive management
Routine, regular management reports
Budgetary control systems
Ensuring conformance with budgetary plans
Management control systems
Performance measures
Gross profit, net profit, revenue
ROI, ROE
Multiple performance measures.

18. Multiple measures of performance
Performance measures
– expenditure, revenues, profit, multiple measures
profitability - return on investment in that division
growth in market share, revenues and profit
customer satisfaction
capital expenditure project performance
management development and succession planning
product and service development
employee training, labour turnover and employee attitudes
contributing to the group's corporate social responsibility
risk monitoring and management
balancing the short term with the long term.

19. Accountability The Board’s responsibility for accountability
Reporting to shareholders
Statutory and mandatory reporting
Companies’ Registry
Regulators
SEC, FSA, SFC
NYSE, LSE, HKSE
Non-financial reporting
Reporting to other stakeholders
Corporate Social Responsibility (CSR) reporting.

20. Board committees Board committees in most CG codes audit committee
remuneration committee
nomination committee
Other board committees for the oversight of management
governance and compliance committee
Corporate ethics committee
Committees to spread the work of the board
executive committee
finance committee
strategic planning committee
risk management committee
ad hoc committees for specific issues or projects.

21. Functions of the board

22. Balancing the board’s efforts
How should boards spend their time?
Figure 7.4: Normative balance of board functions: how directors suggest boards should balance their activities

23. Balancing the board’s efforts
How do boards spend their time?
Figure 7.5: Reported balance of board functions: how directors believe boards do balance their activities

24. Corporate transparency
A sound narrative report will contain at least:
a balanced review of the business of the company
a comprehensive analysis of key financial and operating performance indicators
an explanation of the principal risks facing the company
details of any significant events that the company has experienced recently
an indication of any planned future developments
a statement about the company's relationships with key stakeholders, including employees, customers and suppliers
a report on the company's policies on corporate social responsibility and sustainability.

25. Corporate transparency
Crucial questions for a corporate narrative report :
what creates value in the company?
what makes it profitable?
what is the risk in the business?
what is affecting the company's prospects?

26. Functions of the Board We have considered: what the board does
balancing the board’s performance and conformance roles
board committees - functions and authority
delegating board functions to management
corporate transparency.